Time Warner Cable Profits Drop As It Continues To Lose Pay-TV Subscribers

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Time Warner Cable (NYSE:TWC) recently reported its Q3 2014 earnings with a 6% drop in profits to $499 million. However, adjusted earnings grew 10% to $1.86 per share. The revenues grew 3.6% to $5.71 billion, led by 11% growth in the residential broadband business. [1] The company continued to bleed pay-TV customers and lost 184,000 subscribers during the quarter. This is far worse than Cable giant Comcast (NASDAQ:CMCSA), which lost only 81,000 video subscribers in the third quarter (Read More – NBCUniversal Boosts Comcast’s Q3 Earnings). Time Warner Cable’s business services segment continued to outperform with 22% revenue gains, driven by a growth in broadband and voice segment. The company has lowered the revenue guidance for the year primarily due to its Los Angeles Dodgers regional sports network failing to gain carriage with major pay-TV operators. [2]

While we continue to believe that the company will see robust growth in its broadband business due to the increasing demand for higher speed and connectivity, taming the pay-TV subscriber losses remains a key challenge for the company and it could lead to continued drop in pay-TV market share over the next few quarters.

We estimate revenues of about $22.72 billion for Time Warner Cable in 2014, with Non-GAAP EPS of $7.75, which is in line with the market consensus of $7.43-$8.34, compiled by Thomson Reuters. We currently have a $120 price estimate for Time Warner Cable, which we will soon update based on the third quarter earnings announcement.

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See our complete analysis for Time Warner Cable

Pay-TV Subscriber Base Shrinks Further

We estimate that the pay-TV business contributes close to 40% to Time Warner Cable’s stock value. During the third quarter, pay-TV revenues declined by 4% to $2.50 billion as compared to the prior year quarter. This can be attributed to a decline of 184,000 video subscribers, taking the total subscriber base to 10.83 million, down 5% as compared to the prior year period. [1] The company reported weaker subscriber numbers despite a favorable comparison with the prior year period, when the company lost 306,000 video subscribers amid a dispute with CBS Corporation (NYSE:CBS). However, pay-TV ARPU improved slightly to $76.39 as compared to $74.90 in the prior year period.

Despite the weaker pay-TV numbers, overall residential services segment EBITDA remained flat at $2.13 billion, benefiting from the broadband growth. While Time Warner Cable is not the only pay-TV operator losing video subscribers amid fierce competition in a saturated market, the pace of decline is much higher than its peers. This can be attributed to lower customer satisfaction and frequent blackouts of various networks in the past. The company in its earnings call stated that it is now seeing improvements in customer satisfaction, which will eventually translate into lower churn and benefit subscriber performance. [2]

Broadband Continues To Make Up For The Declines In Pay-TV

We estimate that broadband contributes close to 40% to Time Warner Cable’s stock value. The residential revenues increased by 11% to $1.62 billion while the business services jumped 22% to $343 million during the third quarter. This can be attributed to the continued growth in ARPU and subscriber base. The ARPU for residential broadband increased 7% to $47.24. [1] Broadband has remained the leading growth factor for the cable companies for quite some time now. There is a boom in demand for broadband in the U.S. as there is a growing need for speed and connectivity. The use of multiple devices and higher penetration of smartphones is aiding the overall demand for high-speed Internet. Smartphone penetration has seen rapid growth from 54% in December 2012 to 72% in June 2014. Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the U.S. Video streaming, for instance, requires high data volumes which explains why the reliance on fixed networks is far greater than that on mobile carriers. We expect Time Warner Cable to continue to gain broadband subscribers in the near term, in part driven by its triple play bundles.

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Notes:
  1. Time Warner Cable’s SEC Filings [] [] []
  2. Time Warner Cable’s (TWC) CEO Robert Marcus on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 30, 2014 [] []